Top 5 uses for your home equity

Top 5 uses for your equity

What’s the point of all that home equity if you’re not going to use any of it? That’s what Australians around the country are probably asking themselves. And when you consider the fact that, as the Australian Bureau of Statistics reported at the end of 2011, increase in equity was responsible for around a third of the 30 percent rise in household wealth during 2003-09, it’s not hard to see why. 

In fact, it seems more and more Australians are refinancing their home loans to make use of their gains, if a recent IBISWorld release is anything to go by. 

“Rising house prices have enabled many mortgage holders to refinance and release more of the equity in their homes,” said IBISWorld Industry Analyst Andrei Ivanov in a January 6 release. 

“This has encouraged households to spend on one-off big-ticket items, such as new cars, despite broader concerns about incomes and cashflow.”

Are you one of these equity-loaded Australians? If so, maybe it’s time you thought about spending that hard-earned gain. Here are a few options. 

Purchase a car

As the IBISWorld release indicates, this is already an option increasing numbers of Australians are turning to. Between 2009 and 2014, the total number of new cars sold increased from 916,050 to 1,122,100, with the average financed amount rising from $3718.63 to $6110.52. 

It makes sense that Australians are doing so. Motor vehicles are purchases on the higher end of the scale in terms of price, yet they’re also a daily necessity. And while car loans are always available to help Australians finance their vehicle purchases, it’s useful to have something to draw on for capital to pay for part, or even all, of the car. 

Go on a holiday

We all need a little bit of a break sometimes to recharge our batteries. There’s a reason why paid holiday leave is mandated by law — it’s a necessary part of the way work functions. 

Of course, getting together the necessary funding to pay for that holiday is another matter, particularly if it happens to be an expensive overseas one. And with Roy Morgan reporting that Australians passion for travelling to the US has increased over the last few years, it seems that’s exactly what Australians’ holidays are turning into. 

Invest in another property

One of the fantastic things about buying property is that it can turn into a perpetually self-reinforcing cycle — only in a positive way. 

When you purchase a property, it automatically becomes an investment as it begins to steadily accrue value. Then, when you’ve paid off enough of the mortgage and you decide you want to buy a new property purely in order to invest, you can use the resulting equity as a deposit on this new piece of real estate. Eventually, that property will also have built up a significant amount of capital too!

Invest in general

Of course, your equity’s investment potential isn’t solely limited to property. You can use it build an investment portfolio using a variety of different asset classes, from managed funds to shares. 

Not all of these types of investments require a lot of capital. Managed funds, for instance, can be bought into with as little as $1,000. Still the more initial capital you have to put in, the more you stand to get out of your investment — not to mention that you won’t be closed out of more expensive purchases. 

Renovate your home

This is the classic option — expanding or making an addition to your home is one of the most typical uses equity gets put toward by homeowners. Whether you want to add a second bathroom, create a world-class outdoor patio or maybe even add a granny flat for an extra source of cashflow, your home equity is a fantastic way to finance this. 

What will you use your capital gains for?

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Learn more about home loans

What is equity? How can I use equity in my home loan?

Equity refers to the difference between what your property is worth and how much you owe on it. Essentially, it is the amount you have repaid on your home loan to date, although if your property has gone up in value it can sometimes be a lot more.

You can use the equity in your home loan to finance renovations on your existing property or as a deposit on an investment property. It can also be accessed for other investment opportunities or smaller purchases, such as a car or holiday, using a redraw facility.

Once you are over 65 you can even use the equity in your home loan as a source of income by taking out a reverse mortgage. This will let you access the equity in your loan in the form of regular payments which will be paid back to the bank following your death by selling your property. But like all financial products, it’s best to seek professional advice before you sign on the dotted line.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

Savings over

Select a number of years to see how much money you can save with different home loans over time.

e.g. To see how much you could save in two years by switching mortgages,  set the slider to 2.

What is equity and home equity?

The percentage of a property effectively ‘owned’ by the borrower, equity is calculated by subtracting the amount currently owing on a mortgage from the property’s current value. As you pay back your mortgage’s principal, your home equity increases. Equity can be affected by changes in market value or improvements to your property.

What is a line of credit?

A line of credit, also known as a home equity loan, is a type of mortgage that allows you to borrow money using the equity in your property.

Equity is the value of your property, less any outstanding debt against it. For example, if you have a $500,000 property and a $300,000 mortgage against the property, then you have $200,000 equity. This is the portion of the property that you actually own.

This type of loan is a flexible mortgage that allows you to draw on funds when you need them, similar to a credit card.

Monthly Repayment

Your current monthly home loan repayment. To accurately calculate how much you could save, an accurate payment figure is required. If you are not certain, check your bank statement.

What is an investment loan?

An investment loan is a home loan that is taken out to purchase a property purely for investment purposes. This means that the purchaser will not be living in the property but will instead rent it out or simply retain it for purposes of capital growth.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

Does Australia have no-deposit home loans?

Australia no longer has no-deposit home loans – or 100 per cent home loans as they’re also known – because they’re regarded as too risky.

However, some lenders allow some borrowers to take out mortgages with a 5 per cent deposit.

Another option is to source a deposit from elsewhere – either by using a parental guarantee or by drawing out equity from another property.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

Are bad credit home loans dangerous?

Bad credit home loans can be dangerous if the borrower signs up for a loan they’ll struggle to repay. This might occur if the borrower takes out a mortgage at the limit of their financial capacity, especially if they have some combination of a low income, an insecure job and poor savings habits.

Bad credit home loans can also be dangerous if the borrower buys a home in a stagnant or falling market – because if the home has to be sold, they might be left with ‘negative equity’ (where the home is worth less than the mortgage).

That said, bad credit home loans can work out well if the borrower is able to repay the mortgage – for example, if they borrow conservatively, have a decent income, a secure job and good savings habits. Another good sign is if the borrower buys a property in a market that is likely to rise over the long term.

What is bridging finance?

A loan of shorter duration taken to buy a new property before a borrower sells an existing property, usually taken to cover the financial gap that occurs while buying a new property without first selling an older one.

Usually, these loans have higher interest rates and a shorter repayment duration.

How much deposit do I need for a home loan from NAB?

The right deposit size to get a home loan with an Australian lender will depend on the lender’s eligibility criteria and the value of your property.

Generally, lenders look favourably on applicants who save up a 20 per cent deposit for their property This also means applicants do not have to pay Lenders Mortgage Insurance (LMI). However, you may still be able to obtain a mortgage with a 10 - 15 per cent deposit.  

Keep in mind that NAB is one of the participating lenders for the First Home Loan Deposit Scheme, which allows eligible borrowers to buy a property with as low as a 5 per cent deposit without paying the LMI. The Federal Government guarantees up to 15 per cent of the deposit to help first-timers to become homeowners.